<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6959
MITCHELL ENERGY & DEVELOPMENT CORP.
(Exact name of registrant as specified in charter)
TEXAS 74-1032912
(State of incorporation) (I.R.S. Employer Identification No.)
2001 TIMBERLOCH PLACE
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 377-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Shares of common stock outstanding at May 9, 2000:
Class A......................... 22,305,433
Class B......................... 26,797,851
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Part I - Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Representation............................................................................... 1
Consolidated Balance Sheets.................................................................. 2
Unaudited Consolidated Statements of Earnings................................................ 3
Unaudited Consolidated Statement of Stockholders' Equity..................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows.................................... 5
Notes to Unaudited Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations................................................. 11
Part II - Other Information
Item 1. Legal Proceedings...................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
</TABLE>
DEFINITIONS. As used herein, "MMBtu" means million British thermal units, "Mcf"
means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion
cubic feet, "Tcf" means trillion cubic feet, "Bbl" means barrel, "MMBbls" means
million barrels, "NGL" or "NGLs" means natural gas liquids, "fiscal 2000" and
"fiscal 2001" refer, respectively, to the 12-month periods ended January 31,
2000 and 2001 and "DD&A" means depreciation, depletion and amortization.
Pipeline throughput volumes are based on average energy content of 1,000 Btu per
cubic foot. Where applicable, NGL volume, price and reserve information and
pipeline throughput include equity partnership interests.
<PAGE> 3
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
REPRESENTATION. The consolidated financial statements of Mitchell Energy &
Development Corp. and subsidiaries (the "Company") and related notes included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures included herein are adequate to make
the information presented not misleading. In the opinion of the Company's
management, all adjustments - which include only normal and recurring
adjustments - necessary for a fair presentation of the financial position and
results of operations for the periods presented have been made. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Fiscal 2000 Annual Report and with the
Management's Discussion and Analysis of Financial Position and Results of
Operations sections of that and this report.
-1-
<PAGE> 4
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
APRIL 30, January 31,
2000 2000
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................................... $ 34,658 $ 15,957
Trade receivables ................................................................... 45,907 46,103
Inventories ......................................................................... 10,692 7,178
Other ............................................................................... 5,040 6,194
------------ ------------
Total current assets ........................................................... 96,297 75,432
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation,
depletion and amortization of $1,509,224 and $1,492,640
Exploration and production
Oil and gas properties ............................................................ 700,914 694,064
Support equipment and facilities .................................................. 12,650 13,025
Gas services (including investments in equity partnerships) (Note 2)
Natural gas processing ............................................................ 80,797 105,489
Natural gas gathering ............................................................. 168,905 153,834
Other ............................................................................. 87,913 85,243
Corporate ........................................................................... 3,366 3,784
------------ ------------
1,054,545 1,055,439
------------ ------------
LONG-TERM INVESTMENTS AND OTHER ASSETS .............................................. 38,198 37,197
------------ ------------
$ 1,189,040 $ 1,168,068
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Oil and gas proceeds payable......................................................... $ 94,535 $ 83,526
Accounts payable .................................................................... 33,894 36,411
Income taxes payable ................................................................ 11,514 380
Accrued liabilities ................................................................. 32,754 31,965
------------ ------------
Total current liabilities ...................................................... 172,697 152,282
------------ ------------
LONG-TERM DEBT (Note 3) ............................................................. 324,267 369,267
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ............................................................... 173,063 161,338
Retirement obligations .............................................................. 69,888 70,411
Deferred income and other ........................................................... 15,720 16,228
------------ ------------
258,671 247,977
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value (authorized 10,000,000 shares; none issued)
Common stock, $.10 par value
(authorized 100,000,000 Class A and 100,000,000 Class B shares) ................... 5,386 5,386
Additional paid-in capital .......................................................... 143,469 143,636
Retained earnings ................................................................... 395,028 359,603
Other comprehensive loss ............................................................ (5,933) (5,933)
Treasury stock, at cost ............................................................. (104,545) (104,150)
------------ ------------
433,405 398,542
------------ ------------
$ 1,189,040 $ 1,168,068
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30
------------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUES
Exploration and production ......................................................... $ 89,777 $ 46,749
Gas services (including a gain of $4,884 from an asset exchange in 2000) (Note 2) .. 226,004 113,207
--------- ---------
315,781 159,956
--------- ---------
OPERATING COSTS AND EXPENSES
Exploration and production (net of a litigation
provision reversal of $9,000 in 1999) (Note 6) .................................. 51,587 35,439
Gas services ....................................................................... 186,976 101,712
--------- ---------
238,563 137,151
--------- ---------
SEGMENT OPERATING EARNINGS (Note 6) ................................................ 77,218 22,805
General and administrative expense ................................................. 7,007 6,269
--------- ---------
TOTAL OPERATING EARNINGS ........................................................... 70,211 16,536
--------- ---------
OTHER EXPENSE
Interest expense ................................................................... 7,628 9,039
Other, net ......................................................................... (1,932) (1,606)
--------- ---------
5,696 7,433
--------- ---------
EARNINGS BEFORE INCOME TAXES ....................................................... 64,515 9,103
INCOME TAXES (Note 4) .............................................................. 22,860 3,419
--------- ---------
NET EARNINGS ....................................................................... $ 41,655 $ 5,684
========= =========
BASIC AND DILUTED NET EARNINGS PER SHARE (Note 8)
Class A ............................................................................ $ .84 $ .11
Class B ............................................................................ .85 .12
AVERAGE COMMON SHARES OUTSTANDING (Basic) - Class A ................................ 22,321 22,322
Class B ................................ 26,805 26,796
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
For the Three Months Ended April 30, 2000
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Other
Additional Compre-
Common Paid-in Retained hensive Treasury
DOLLAR AMOUNTS Total Stock Capital Earnings Loss Stock
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 ........................ $ 398,542 $ 5,386 $ 143,636 $ 359,603 $ (5,933) $(104,150)
Net earnings ..................................... 41,655 -- -- 41,655 -- --
Cash dividends (12 cents per share on Class A
and 13.25 cents per share on Class B) ......... (6,230) -- -- (6,230) -- --
Treasury stock purchases ......................... (977) -- -- -- -- (977)
Exercises of stock options ....................... 415 -- (167) -- -- 582
--------- --------- --------- --------- --------- ---------
BALANCE, APRIL 30, 2000 .......................... $ 433,405 $ 5,386 $ 143,469 $ 395,028 $ (5,933) $(104,545)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock Outstanding Shares
-------------------------- ------------------------- --------------------------
SHARE AMOUNTS Class A Class B Class A Class B Class A Class B
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 ........ 23,978,072 29,878,072 1,656,437 3,082,450 22,321,635 26,795,622
Treasury stock purchases ......... -- -- 16,200 25,000 (16,200) (25,000)
Exercises of stock options ....... -- -- -- (25,231) -- 25,231
Other ............................ (2) (2) -- -- (2) (2)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, APRIL 30, 2000 .......... 23,978,070 29,878,070 1,672,637 3,082,219 22,305,433 26,795,851
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30
------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ................................................................. $ 41,655 $ 5,684
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation, depletion and amortization ............................... 33,134 27,732
Deferred income taxes .................................................. 11,725 3,137
Exploration expenses (including exploratory well impairments) .......... 1,774 2,298
Distributions in excess of (less than) earnings of equity investees .... (117) 4,420
Gain from asset exchange ............................................... (4,884) --
Litigation provision reversal .......................................... -- (9,000)
Other, net ............................................................. (2,063) (3,829)
--------- ---------
81,224 30,442
Changes in operating assets and liabilities ............................ 23,248 (1,199)
--------- ---------
Cash provided by operating activities .................................. 104,472 29,243
--------- ---------
INVESTING ACTIVITIES
Capital and exploratory expenditures
Total on accrual basis .................................................... (45,863) (26,323)
Adjustment to cash basis .................................................. (3,831) (5,603)
--------- ---------
(49,694) (31,926)
Proceeds from dispositions of property, plant and equipment ................ 15,112 7,379
Other, net ................................................................... 603 1,582
--------- ---------
Cash used for investing activities ..................................... (33,979) (22,965)
--------- ---------
FINANCING ACTIVITIES
Debt repayments .............................................................. (45,000) (6,100)
Cash dividends ............................................................... (6,230) (6,229)
Treasury stock purchases ..................................................... (977) --
Other ........................................................................ 415 (317)
--------- ---------
Cash used for financing activities ..................................... (51,792) (12,646)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 18,701 (6,368)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 15,957 20,300
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 34,658 $ 13,932
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
MITCHELL ENERGY & DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2000
(1) ACCOUNTING POLICIES
Mitchell Energy & Development Corp. and its majority-owned subsidiaries (the
"Company") constitute a large independent energy company engaged in the
exploration for and development and production of natural gas, natural gas
liquids, and crude oil and condensate. The Company also operates natural gas
gathering systems in Texas and markets natural gas through purchase and resale
activities.
The consolidated financial statements include the accounts of the Company
after elimination of all significant intercompany accounts and transactions. The
equity method of accounting is used for investments in 20%-to-50%-owned
entities.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company's exploration and production activities are accounted for
using the "successful efforts" method. Long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When it is
determined that an asset's estimated future net cash flows will not be
sufficient to recover its carrying amount, an impairment charge is recorded to
reduce the carrying amount for that asset to its estimated fair value.
Impairment assessments for proved oil and gas properties are made on a
field-by-field basis. There were no charges for proved-property impairments
during the three-month periods ended April 30, 2000 and 1999.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. The statement, which the Company must adopt for fiscal
2002, generally requires that derivatives be recognized at fair value as assets
or liabilities and that changes in fair value be recorded in earnings or other
comprehensive income. The Company's infrequent use of derivatives makes it
unlikely that the adoption of this statement will have a significant impact on
its financial position or results of operations.
-6-
<PAGE> 9
(2) PARTNERSHIP INVESTMENTS
A summary of the Company's net investments in partnerships at April 30, 2000 and
January 31, 2000 and its equity in their pretax earnings for the three-month
periods ended April 30, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
Equity in
Net Investment Pretax Earnings
------------------------- ------------------------
Percent April 30, January 31, April 30, April 30,
Owned 2000 2000 2000 1999
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
NATURAL GAS PROCESSING
C&L Processors Partnership (C&L) ..................... 50* $ -- $ 25,016 $ 1,328 $ (723)
U.P. Bryan Plant ..................................... 45* -- 2,091 3,115 1,172
--------- --------- --------- ---------
-- 27,107 4,443 449
--------- --------- --------- ---------
GAS GATHERING AND MARKETING
Austin Chalk Natural Gas
Marketing Services (Austin Chalk) ................. 45* -- 163 (331) 391
Ferguson-Burleson County Gas Gathering System
(Ferguson-Burleson) ............................... 45* -- 35,744 (152) 808
Louisiana Chalk Gathering System ..................... 50 15,648 15,904 (256) (237)
Others ............................................... 571 501 70 35
--------- --------- --------- ---------
16,219 52,312 (669) 997
--------- --------- --------- ---------
OTHER
Belvieu Environmental Fuels .......................... 33.33 58,108 54,988 779 737
Gulf Coast Fractionators ............................. 38.75 28,285 28,709 3,625 667
--------- --------- --------- ---------
86,393 83,697 4,404 1,404
--------- --------- --------- ---------
$ 102,612 $ 163,116 $ 8,178 $ 2,850
========= ========= ========= =========
</TABLE>
--------------------------
* Prior to the asset exchange on March 31, 2000 discussed below.
For the applicable periods, the Company's net investment in these entities is
reported as property, plant and equipment in the consolidated balance sheets and
its equity in their pretax earnings is reported as revenues in the consolidated
statements of earnings, each under the gas services caption.
During the third quarter of fiscal 2000, C&L distributed the Jameson gas
processing plant and related facilities to its partners, Conoco and a
wholly-owned subsidiary of the Company. The Company subsequently purchased
Conoco's 50% interest for approximately $23,900,000, and the Jameson facilities
became wholly owned and ceased being reported as part of C&L's operations
effective October 1, 1999.
On March 31, 2000, the Company exchanged its share of the gathering and
processing assets of C&L (non-operated Oklahoma facilities having a net book
value of $26,946,000) for Duke Energy Field Services, Inc.'s share of the
Company-operated gathering and processing assets of the U.P. Bryan Plant, Austin
Chalk and Ferguson-Burleson partnerships and $11,666,000 in cash. Each of the
four partnerships distributed all of their operating assets to their partners
prior to the exchange and ceased operations. A gain of $4,884,000 was recognized
in connection with the exchange.
Summarized earnings information (on a 100% basis) for these entities for
the three-month periods ended April 30, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Revenues...................................................... $128,874 $119,873
Operating earnings............................................ 18,213 14,287
Pretax earnings............................................... 18,151 8,146
</TABLE>
-7-
<PAGE> 10
(3) LONG-TERM DEBT,
At April 30, 2000, the Company's outstanding debt consisted of $314,267,000 of
unsecured parent company senior notes, the proceeds of which have been advanced
to the operating subsidiaries, and borrowings of $10,000,000 under a
$250,000,000 bank revolving credit facility. Any amounts then outstanding under
the bank revolving credit facility are payable in July 2003. Interest rates,
which generally are based on spreads over LIBOR, vary based on the highest of
the ratings given the Company's senior notes by two specified rating agencies.
The Company pays commitment fees on the unused portion of this facility.
The bank revolving credit agreement contains certain restrictions which,
among other things, limit the payment of dividends by requiring consolidated
tangible net worth, as defined, to equal at least $275,000,000 and require the
maintenance of a specified consolidated leverage ratio based on earnings before
interest, taxes and DD&A and excluding extraordinary, unusual, non-recurring and
non-cash charges and credits. Retained earnings available for the payment of
cash dividends totaled $156,725,000 at April 30, 2000.
(4) INCOME TAXES
Income taxes for the three-month periods ended April 30, 2000 and 1999 consist
of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Current - Federal.......................................... $11,024 $ 232
State............................................ 111 50
------- -------
11,135 282
------- -------
Deferred - Federal......................................... 10,551 2,975
State........................................... 1,174 162
------- -------
11,725 3,137
------- -------
$22,860 $ 3,419
======= =======
</TABLE>
Estimated annual tax rates of 35.4% and 37.6%, respectively, were used in
computing the income tax provisions for the three-month periods ended April 30,
2000 and 1999. The differences between those rates and the 35% statutory Federal
income tax rate were principally the result of the interplay of Federal tax
credits and charges for state income taxes.
(5) COMMITMENTS AND CONTINGENCIES
The Company is party to claims and legal actions arising in the ordinary course
of its business and to recurring examinations performed by the Internal Revenue
Service and other regulatory agencies. While the outcome of all such matters
cannot be predicted with certainty, management expects that losses, if any,
resulting from the ultimate resolution of the matters discussed in this
paragraph will not result in charges that are material to the Company's
financial position. It is possible, however, that charges could be required that
would be significant to the operating results of a particular period.
The Company holds a one-third interest in a partnership which owns a plant
that manufactures a gasoline additive known as MTBE. In March 1999, the governor
of California ordered that the use of MTBE be phased out in that state over a
four-year period. In July 1999, a national advisory panel formed by the EPA
recommended that the use of MTBE be reduced, and in August 1999 a group of seven
northeastern states took steps that would lead to the phase-out of MTBE usage
over a three-year period. Restrictions on the use of MTBE could significantly
impact future operations of the MTBE plant partially owned by the Company.
However, that facility, which was built in the mid 1990s for approximately
$225,000,000, was originally designed in a manner that allows it - with moderate
expenditures - to be converted to the production of other products. It is not
possible at this time to determine the ultimate impact, if any, of this matter
on the Company's financial position or future results of operations.
-8-
<PAGE> 11
(6) SEGMENT INFORMATION
Selected industry segment data for the indicated periods follows (in thousands):
<TABLE>
<CAPTION>
Inter- Segment Total Capital
Outside segment Operating Operating Expendi-
Revenues Revenues Earnings Earnings DD&A tures(a)
-------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED APRIL 30, 2000
Exploration and Production........................ $ 89,777 $ -- $ 38,190 $ 35,904 $ 27,112 $ 39,258
-------- -------- -------- -------- -------- --------
GAS SERVICES
Natural gas processing ........................... 151,601 38,900 24,612 23,878 1,582 1,187
Natural gas gathering and marketing .............. 65,105 96,325 5,316 4,466 3,989 5,322
Other ............................................ 4,414 -- 4,216 4,155 27 42
Gain from asset exchange (Note 2) ................ 4,884 -- 4,884 4,884 -- --
-------- -------- -------- -------- -------- --------
226,004 135,225 39,028 37,383 5,598 6,551
-------- -------- -------- -------- -------- --------
CORPORATE ........................................ -- -- -- (3,076)(b) 424 54
-------- -------- -------- -------- -------- --------
$315,781 $135,225 $ 77,218 $ 70,211 $ 33,134 $ 45,863
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED APRIL 30, 1999
EXPLORATION AND PRODUCTION
Operations........................................ $ 46,749 $ -- $ 2,310 $ (257) $ 23,626 $ 21,152
Water well litigation provision reversal ......... -- -- 9,000 9,000 -- --
-------- -------- -------- -------- -------- --------
46,749 -- 11,310 8,743 23,626 21,152
-------- -------- -------- -------- -------- --------
GAS SERVICES
Natural gas processing ........................... 61,169 16,381 3,896 3,206 925 2,058
Natural gas gathering and marketing .............. 50,634 42,338 6,392 5,608 2,562 2,935
Other ............................................ 1,404 -- 1,207 1,127 27 71
-------- -------- -------- -------- -------- --------
113,207 58,719 11,495 9,941 3,514 5,064
-------- -------- -------- -------- -------- --------
CORPORATE ........................................ -- -- -- (2,148)(b) 592 107
-------- -------- -------- -------- -------- --------
$159,956 $ 58,719 $ 22,805 $ 16,536 $ 27,732 $ 26,323
======== ======== ======== ======== ======== ========
</TABLE>
-------------------------------
(a) On accrual basis, including exploratory expenses and acquisitions.
(b) General corporate expenses.
The Company's reported business segments are based on the organizational
structure used by management to assess performance and make resource allocation
decisions. The Company's three principal business segments are: exploration and
production, natural gas processing, and gas gathering and marketing. Exploration
and production segment operations include the exploration for and development
and production of natural gas and oil. Natural gas processing segment operations
include the extraction of natural gas liquids from natural gas processed at
facilities owned by the Company and third parties. The gas gathering and
marketing segment operates Company-owned natural gas gathering systems and
markets natural gas through purchase and resale transactions.
After entering into a defense cost reimbursement agreement with an
insurance carrier during March 1999, a water well litigation provision reversal
of $9,000,000 was recorded during the quarter ended April 30, 1999.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $10,333,000 and $9,689,000 during the three-month periods
ended April 30, 2000 and 1999. Income taxes paid totaled $1,000 during the
three-month period ended April 30, 2000; income tax refunds totaling $1,335,000
were collected during the comparable prior-year period. Other than the asset
exchange discussed in Note 2, there were no significant non-cash investing or
financing activities during the three-month periods ended April 30, 2000 and
1999.
-9-
<PAGE> 12
(8) EARNINGS PER SHARE
The Company is required to make separate earnings per share computations for its
Class A and Class B common stock since the shares are not convertible into each
other and different per share cash dividends are paid on the separate classes.
In those computations, differences between net earnings and total dividends paid
are apportioned between the classes on a pro rata per-share basis and then added
to the respective dividends paid to each of the classes. Accordingly,
differences in earnings per share for Class A and Class B shares occur because
of the dividend premium on the Class B shares. The following table sets forth
basic and diluted earnings per share information for the three-month periods
ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
--------------------- --------------------
Class A Class B Class A Class B
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings....................................................... $.84 $.85 $.11 $.12
==== ==== ==== ====
</TABLE>
There were no differences in the reported basic and diluted earnings per
share because the earnings amounts were the same in the basic and diluted
computations, and the dilutive effect of stock options did not significantly
increase the number of weighted average shares outstanding. The following table
reconciles the weighted average shares outstanding used in the basic and diluted
computations for the three-month periods ended April 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
2000 1999
--------------------- --------------------
Class A Class B Class A Class B
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Used in basic computations......................................... 22,321 26,805 22,322 26,796
Dilutive effect of stock options................................... 6 338 -- 20
------ ------ ------ ------
Used in diluted computations....................................... 22,327 27,143 22,322 26,816
====== ====== ====== ======
</TABLE>
Excluded from these computations because their effect would have been
antidilutive were stock options covering 347,050 Class B shares for the
three-month period ended April 30, 2000 and 78,258 Class A and 1,678,735 Class B
shares for the three-month period ended April 30, 1999.
At their annual meeting on June 28, 2000, the Company's stockholders will
vote on a proposal to combine the Class A and Class B shares into a single
voting class. The combination would occur by early July. Thereafter, earnings
per share would be reported for the single class and prior-period amounts would
be restated for comparability purposes.
(9) STOCK OPTIONS AND BONUS UNITS
On May 1, 2000, stock options covering 453,100 shares and 342,800 bonus units
were issued to employees by the Company at option/floor prices of $23.9375. Like
previous grants, these awards vest in three equal annual installments and have
ten-year lives.
-10-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
All statements included in this Form 10-Q, other than statements of historical
fact, are forward-looking statements. These include, but are not limited to,
strategies, goals and expectations set forth herein concerning exploration and
production and gas services operations and the discussions below concerning the
Company's liquidity and capital resources. Although the Company believes that
its expectations are based on reasonable assumptions, it can give no assurances
that its goals will be achieved. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include the timing and extent of changes in commodity prices for natural gas,
NGLs and crude oil; the attainment of forecasted operating levels and reserve
replacement; and unexpected changes in competitive and economic conditions,
government regulations, technology and other factors.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. After being adversely impacted by unusually low prices for its
products in fiscal 1999 and early fiscal 2000, the Company's results for the
final three quarters of fiscal 2000 improved dramatically as energy prices rose
sharply. The upward price trend continued into the first quarter of fiscal 2001.
Also, contributing to the earnings improvement were reduced costs and expenses
resulting from the personnel reduction program undertaken late in fiscal 1999, a
lowering of geological and geophysical expenses, and other actions taken by the
Company. Earnings per share, excluding the impact of unusual items, for fiscal
2001's first quarter were $.78 and $.79 per share, respectively, for the
Company's Class A and Class B shares, the highest such per share earnings levels
in the Company's history. For the last four quarters, the Company's net earnings
totaled $133.2 million ($2.68 and $2.72 per share for Class A and Class B
shares). Its cash flows from operating activities during that period totaled
$315.9 million.
While the Company's earnings and cash flows are affected by many things,
energy prices are clearly one of the most significant. The following table shows
the Company's quarterly average sales prices for the first quarter of fiscal
2001 and the prior two fiscal years:
<TABLE>
<CAPTION>
Crude Oil and
Natural Gas (per Mcf) Condensate (per Bbl) NGLs (per Bbl)
--------------------------- --------------------------- ---------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter......... $3.02 $1.84 $2.29 $26.83 $12.56 $13.93 $20.51 $10.68 $11.44
Second quarter........ 2.40 2.25 16.44 12.33 13.33 10.22
Third quarter......... 2.94 1.90 20.67 12.22 17.52 9.79
Fourth quarter........ 2.78 1.99 24.32 10.25 17.96 9.27
Fiscal year........... 2.50 2.11 18.49 12.18 15.07 10.23
</TABLE>
Prices fell throughout fiscal 1999 to low points not seen for oil and NGLs since
1986 as worldwide oil production rose during a period of relatively weak demand
and inventories reached unusually high levels. During fiscal 2000, worldwide oil
production fell as OPEC and other countries adopted lower production targets.
Excess inventories were worked down and prices for oil and NGLs rose steadily.
After being at record lows early in fiscal 2000, oil and NGL prices rose early
in fiscal 2001 to levels not seen in many years. Natural gas prices - while not
moving steadily upward - were relatively strong in fiscal 2000. As shown in the
table above, gas prices strengthened further in the current fiscal year, due to
reduced deliverability, low storage levels and strong demand. Recently, natural
gas sales prices have exceeded $4.00 per Mcf.
After taking actions late in fiscal 1999 to sharply reduce operating costs
and capital expenditures to position itself to operate in a low-energy-price
environment, the Company began taking steps in the first half of fiscal 2000 to
substantially increase its development drilling and well recompletion programs
in the Barnett Shale area of North Texas as the price outlook improved. The
Company's accelerated Barnett development program begun in the last half of
fiscal 2000 pushed natural gas sales to a record 279 MMcf per day in fiscal
2001's first quarter.
-11-
<PAGE> 14
Six rigs are currently drilling in the Barnett, and the Company plans to drill
as many wells there in the first half of fiscal 2001 as were drilled in all of
fiscal 2000 (and twice as many for the full year). This, coupled with an
expanded infill drilling program in the Limestone County area, should allow the
Company to exceed the 15% year-to-year target it previously set for natural gas
sales growth in fiscal 2001.
With improved NGL economics, the acquisition in October 1999 of the other
50% interest in the Jameson plant and increased gathering throughput, NGL
production volumes increased during fiscal 2000 and rose further in the recently
completed quarter. NGL production averaged 51,400 barrels per day during fiscal
2001's first quarter, a level not reached since the early 1990s when three times
as many plants were being operated. An exchange of the Company's interests in
several Oklahoma systems for Duke Energy's 55% interest in jointly owned
processing and gathering assets in the Austin Chalk area of Central Texas was
closed on March 31, 2000, as scheduled. As a result, the Company's involvement
in the operations of four partnerships ceased, and it now has total ownership
and operating control of all its major gas processing and gathering facilities.
This lowered operating costs and gives the Company more flexibility in using
these facilities. NGL production is expected to increase further after
completion of a major expansion of the Bridgeport plant that is now in progress.
If things go as currently anticipated, the Company's daily NGL production could
rise to 60,000 barrels per day during next year's first quarter.
By capturing a large portion of the new gas supplies being developed along
its systems, the Company expects to further grow its gathering and processing
volumes in fiscal 2001 and beyond. By the end of fiscal 2001, volumes on the
Vanderbilt system are expected to equal 125,000 Mcf per day with 6,000 barrels
of associated NGLs, up from 20,000 Mcf and 1,300 barrels early in fiscal 2000
(and none prior to August 1998).
CAPITAL AND EXPLORATORY EXPENDITURES. As previously reported, the Company's
fiscal 2001 capital budget was set at a level 50% above the amount spent in the
prior year (excluding the $23.9 million Jameson acquisition). Recently, the
fiscal 2001 budget was raised by $15.5 million to cover an expansion of the
processing capacity of the Bridgeport plant from 210 to 310 MMcf per day. A
comparison of the revised annual budget for capital and exploratory expenditures
with actual first quarter spending follows (in millions):
<TABLE>
<CAPTION>
Revised First
Annual Quarter
Budget Spending
-------- --------
<S> <C> <C>
Exploration and production ....................... $ 183.1 $ 39.3
Gas services ..................................... 51.7 6.5
Corporate ........................................ 2.2 .1
-------- --------
$ 237.0 $ 45.9
======== ========
</TABLE>
First quarter capital spending was below one-fourth of the full year's budget
primarily because of contractor-related delays affecting drilling activities
and the lack of any spending on the Bridgeport plant expansion.
FINANCING MATTERS. Cash provided by operating activities totaled $104.5 million
in fiscal 2001's first quarter. This, coupled with cash proceeds from the asset
exchange with Duke and sales of non-strategic assets, funded the capital program
and allowed long-term debt to be paid down by $45 million, to $324.3 million.
Treasury stock purchases totaling almost $1 million were made in the first
quarter under the Company's recently announced buyback program. At quarter-end,
long-term debt comprised 43% of total capitalization, down from 48% at the
beginning of the year.
The Company has a $250 million bank revolving credit facility and a $25
million bank money-market facility. At April 30, 2000, borrowings of $10 million
were outstanding under the revolving credit facility. While the Company has no
immediate plans to issue additional senior notes or to increase the size of its
bank revolving credit facility, it has the borrowing capacity to do so should
business opportunities arise that require funding in excess of the amount
available under the existing bank credit facility ($240 million at April 30,
2000). Because of a receivable sales agreement that lowers costs and eliminates
the need to fund the Company's receivables with bank borrowings, the Company's
long-term debt and working capital balances were each $60 million less at April
30, 2000 than they otherwise would have been.
-12-
<PAGE> 15
DISCLOSURES ABOUT MARKET RISK. The Company's major market risk exposure involves
prices for crude oil, natural gas and NGLs. Realized prices for these products
are driven primarily by prevailing world crude oil prices and domestic natural
gas prices. Such prices historically have been volatile (as shown by the table
on page 11), and this is expected to continue. In general, a $1.00 change in the
per-barrel price of oil, together with an equivalent change in the prices for
natural gas and NGLs based on Btu content (16.7 cents for gas and 67 cents for
NGLs), changes the Company's annual segment operating earnings and cash flows by
approximately $23 million and its after-tax annual net earnings by $15 million.
The Company is partially hedged with respect to natural gas prices since
besides being a seller it also purchases gas in connection with its gas
processing operations (after the recent asset exchange, such purchases normally
should range from 40% to 45% of gas sales). Since it has this physical hedge,
the Company rarely enters into hedging transactions to manage its exposure to
price fluctuations. It does not hold or issue derivative instruments for trading
purposes. The Company had no open hedge positions at April 30, 2000, and its
hedging activities during the last three years were insignificant.
The Company's exposure to changing interest rates is limited since almost
97% of its long-term debt at April 30, 2000 consisted of senior notes with fixed
interest rates.
OPERATING STATISTICS
Certain operating statistics (including, where applicable, proportional
interests in equity partnerships) for the three-month periods ended April 30,
2000 and 1999 follow:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
AVERAGE DAILY VOLUMES
Natural gas sales (Mcf) .......................... 279,100 243,900
Crude oil and condensate sales (Bbls) ............ 5,700 6,100
Natural gas liquids produced (Bbls) .............. 51,400 42,100
Pipeline throughput (Mcf) ........................ 708,000 505,000
AVERAGE SALES PRICES
Natural gas (per Mcf) ............................ $ 3.02 $ 1.84
Crude oil and condensate (per Bbl) ............... 26.83 12.56
Natural gas liquids produced (per Bbl) ........... 20.51 10.68
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED APRIL 30, 2000
COMPARED WITH THREE MONTHS ENDED APRIL 30, 1999
Net earnings for the three-month periods ended April 30, 2000 and 1999 - both
before and after unusual items - are summarized in the table on the following
page. For fiscal 2001's first quarter, net earnings totaled $41.7 million,
versus $5.7 million during the comparable prior-year period. Exclusive of
unusual items, first quarter after-tax earnings totaled $38.5 million, versus
$.1 million for the comparable prior-year period. Higher energy prices and
volumes were the principal causes of the period-to-period earnings improvement.
-13-
<PAGE> 16
The following table and discussion identify and explain the major
increases (decreases) in earnings for the three-month periods (in millions):
<TABLE>
<CAPTION>
Segment
Operating Earnings
----------------------
Exploration
and Gas Pretax Net
Production Services Other* Earnings Earnings
----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 2000 AMOUNTS AFTER UNUSUAL ITEMS ........................... $ 11.3 $ 11.5 $ (13.7) $ 9.1 $ 5.7
ELIMINATE IMPACT OF FISCAL 2000 UNUSUAL ITEMS -
Water well litigation provision reversal (see page 9) .......... (9.0) -- -- (9.0) (5.6)
-------- -------- -------- -------- --------
FISCAL 2000 AMOUNTS BEFORE UNUSUAL ITEMS .......................... 2.3 11.5 (13.7) .1 .1
-------- -------- -------- -------- --------
MAJOR INCREASES (DECREASES)
Higher natural gas sales price .................................... 28.3 -- -- 28.3 18.4
Higher natural gas sales volumes .................................. 2.5 -- -- 2.5 1.6
Higher oil and condensate sales price ............................. 7.0 -- -- 7.0 4.6
Higher DD&A rate ($.90 versus $.87 per equivalent Mcf produced) ... (1.8) -- -- (1.8) (1.2)
Higher NGL margins ................................................ -- 18.5 -- 18.5 12.0
Higher NGL volumes ................................................ -- 2.4 -- 2.4 1.5
Equity in earnings of MTBE partnership ............................ -- 2.9 -- 2.9 1.9
Lower interest expense incurred ................................... -- -- 1.4 1.4 .9
Higher effective income tax rate .................................. -- -- -- -- (.2)
Other, net ........................................................ (.1) (1.2) (.4) (1.7) (1.1)
-------- -------- -------- -------- --------
35.9 22.6 1.0 59.5 38.4
-------- -------- -------- -------- --------
FISCAL 2001 AMOUNTS BEFORE UNUSUAL ITEMS .......................... 38.2 34.1 (12.7) 59.6 38.5
Gain from asset exchange (see page 7) ............................. -- 4.9 -- 4.9 3.2
-------- -------- -------- -------- --------
FISCAL 2001 AMOUNTS AFTER UNUSUAL ITEMS ........................... $ 38.2 $ 39.0 $ (12.7) $ 64.5 $ 41.7
======== ======== ======== ======== ========
</TABLE>
--------------------------------------------------------
*Includes general and administrative expense and other expense.
EXPLORATION AND PRODUCTION OVERVIEW
Exploration and production segment operating earnings of $38.2 million during
fiscal 2001's first quarter were $35.9 million above those of the comparable
prior-year period. This improvement was principally due to higher prices for
natural gas and oil and increased natural gas sales volumes.
HIGHER NATURAL GAS SALES PRICE ($28.3 MILLION INCREASE). During the first
quarter of fiscal 2001, the Company's natural gas sales price averaged $3.02 per
Mcf, $1.18 (64%) above the prior period's $1.84, increasing operating earnings
by $28.3 million.
HIGHER NATURAL GAS SALES VOLUMES ($2.5 MILLION INCREASE). Natural gas sales
averaged 279.1 MMcf per day during fiscal 2001's first quarter, 14% above the
243.9 MMcf of the comparable prior-year period, improving operating earnings by
$2.5 million.
HIGHER OIL AND CONDENSATE SALES PRICE ($7.0 MILLION INCREASE). The Company's
sales price for oil and condensate averaged $26.83 per barrel during fiscal
2001's first quarter, more than double the prior period's $12.56, increasing
operating earnings by $7.0 million.
-14-
<PAGE> 17
GAS SERVICES OVERVIEW
Exclusive of unusual items, gas services operating earnings rose $22.6 million
to $34.1 million during the first three months of fiscal 2001. The sharply
higher earnings were principally due to price-related improvements in gas
processing margins and higher NGL production volumes. NGL production volumes
averaged 51,400 barrels per day, up 22% from the 42,100 of the corresponding
prior year period. The increased volumes were principally due to (i) the October
1, 1999 acquisition of a 50% interest in the Jameson plant, (ii) increased
throughput of the Company's Vanderbilt system that is processed at the Exxon
Katy plant and (iii) restarting of the Huckabay plant to handle the Company's
increasing North Texas gas production.
HIGHER NGL MARGINS ($18.5 MILLION INCREASE). The average price for NGLs produced
during fiscal 2001's first quarter of $20.51 per barrel was 92% above the
prior-year period's $10.68, improving NGL revenues by $42.4 million. Because of
the quarter's impact of higher NGL and natural gas prices on producer settlement
and gas shrinkage costs, feedstock costs also increased, resulting in a net
$18.5 million price-related increase in NGL margins.
HIGHER NGL VOLUMES ($2.4 MILLION INCREASE). The previously discussed
period-to-period increase in NGL volumes added $2.4 million to operating
earnings.
EQUITY IN EARNINGS OF MTBE PLANT PARTNERSHIP ($2.9 MILLION INCREASE). This
variance occurred both because of fewer downtime days in fiscal 2001's first
quarter (8 versus 22) and higher sales prices during the current period.
LOWER INTEREST EXPENSE INCURRED ($1.4 MILLION INCREASE). This favorable variance
was primarily due to a lower average debt balance during the first three months
of fiscal 2001 ($365.3 million versus $464.5 million), lowering interest expense
by $1.8 million. Reducing the year-to-year savings somewhat were fiscal 2001's
higher interest rates,which also increased the fees paid under the accounts
receivable securitization program.
-15-
<PAGE> 18
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings pending or contemplated at
April 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) No reports were filed on Form 8-K by Mitchell Energy & Development
Corp. during the three-month period ended April 30, 2000.
-16-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL ENERGY & DEVELOPMENT CORP.
-----------------------------------
(Registrant)
Dated: June 2, 2000 By /s/ Philip S. Smith
--------------------------------------
Philip S. Smith
Senior Vice President - Administration
and Chief Financial Officer
-17-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
